People respond to incentives. That does not, in and of itself, make some people “energetic” and others “lazy”. To the contrary, it really means they are responsive and capable of calculating rewards. Critics of the welfare state are sometimes accused of labeling welfare recipients as “lazy”, which is absurd and a cop-out response to serious questions about the size, effectiveness, and even the fairness of means-tested benefits. The structure of welfare benefits in the U.S. often penalizes work effort and market earnings. That being the case, who can blame a recipient for minimizing work effort? From their perspective, that is what society wants them to do. Note that this has nothing to do with the provision of a social safety net for those who are unable to help themselves.

“At issue is the so-called “welfare cliff” beyond which families will literally become poorer the higher their wages, as the drop off in entitlements more than offsets the increase in earnings.“

The cliff looks different in different states and even differs by county. The chart at the top of this post is for Pennsylvania, from the state’s Secretary of Public Welfare, though I saw it on this post from LiberalForum. (Go to the link if the image is not clear). The Zero Hedge post linked above includes a dramatic illustration for Cook County in Illinois. Not many welfare recipients participate in all of the programs shown in the charts, but the point is that many of the programs create nasty incentives that tend to “trap” families at low income levels. Often, these workers and their families would be better off in the long-run if they were to suffer the consequences of the cliff in order to gain more work experience. Unfortunately, few have the resources to ride out a period of lower total income precipitated by the cliff. Another obvious implication is that increases in the minimum wage would actually harm some families by pushing them over the cliff.

Welfare cliffs differ by the recipients’ family structure (one- versus two-parent households, number of children) and do not apply to every welfare program. For example, the Earned Income Tax Credit (EITC) is very well-behaved in the sense that additional work and/or wage income flows through as a net gain the household. While most welfare programs involve a benefits cliff, incentives are undermined even before that point. A flattening in the level of total income as earned income rises indicates that the recipient faces an increasing marginal tax rate. The chart above shows that total income is relatively flat over a range of earned income below the income at which they’d encounter the cliff. This flat range starts at an earned income of $15,000 to $20,000 and extends up to the severe cliff at almost $30,000.

Zero Hedge quotes a report from the Illinois Policy Institute:

“We realize that this is a painful topic in a country in which the issue of welfare benefits and cutting (or not) the spending side of the fiscal cliff have become the two most sensitive social topics. Alas, none of that changes the matrix of incentives for Americans who find themselves facing a comparable dilemma: either remain on the left side of minimum US wage and rely on benefits, or move to the right side at far greater personal investment of work, and energy, and… have the same (or much lower) disposable income at the end of the day.“

Another interesting take on this issue is offered by Dan Mitchell, who cites a recent National Bureau of Economic Research (NBER) paper, which finds:

“…the decline in desire to work since the mid-90s lowered the unemployment rate by about 0.5 ppt and the participation rate by 1.75 ppt. This is a large effect…“

The findings suggest that the welfare reforms of the 1990s actually had positive effects on work effort, though even the EITC creates some incentive problems for second earners. Worst of all is the incentive impact of expanded disability benefits, which have undone some of the gains from reform. Newer programs like Mortgage Assistance and now, Obamacare, have added to the work disincentives. Mitchell cites other research that reinforce these conclusions.

The welfare cliff harms economic efficiency by distorting the offer price of labor, by increasing costs to taxpayers, and by reducing the availability of productive resources. It is grossly unfair because it consigns its intended beneficiaries to a life of dependency. What a waste! Here is Mitchell’s prescription:

“Regarding the broader issue of redistribution and dependency, I argue that federalism is the best approach, both because states will face competitive pressure to avoid excessively generous benefits and because states will learn from each other about the best ways to help the truly needy while minimizing the negative impact of handouts on incentives for productive behavior.“

A side effect of negative welfare incentives is that they increase the relative benefits of participating in illegal income-earning activity. The “War on Drugs” exacerbates this effect by driving up drug prices. Of course, this activity is untaxed, and because it is unreported, it does not push the recipient toward the benefits cliff. This is another example of different government policies working at cross purposes, which is all too common.

Can a piece of legislation say any old thing, leaving the executive branch as the arbiter over what the law “should” say? Can the executive decide a law means one thing ex ante and another ex post? That would be bizarre under the U.S. Constitution, but the Obama Administration has arrogated to itself the role of legislator-in-chief in its implementation the Affordable Care Act (ACA), aka Obamacare, effectively rewriting the law by repeatedly granting waivers and delaying key provisions. And the apparent legal doctrine of “executive license” to rewrite laws would be affirmed if the Supreme Court rules for the government in King v. Burwell.

The case, which was argued before the Court this week, revolves around whether the ACA allows subsidies to be paid on health insurance purchased by qualified consumers on federal exchanges. The plaintiffs say no because, in the “plain language of the statute”, subsidies can be paid only for health insurance purchased on exchanges “established by the state”. A ruling is expected in June.

The provision in question was intended to incent state governments to establish their own exchanges. Most states chose not to do so, however, instead opting to allow their citizens to purchase insurance on a federal exchange. Subsequently, the IRS overrode the provision in question by granting subsidies for purchases on any exchange. The case will be historic if the federal exchange subsidies are overturned, but if not, the ruling will still be historic in setting a precedent that the executive branch can enforce a view of Congressional intent so divergent from written law.

The most interesting aspect of the SCOTUS hearing was Justice Kennedy’s expressed concern that a ruling for the plaintiffs would create a situation in which the federal government coerced states into establishing exchanges, posing a conflict with principles of federalism. The Wall Street Journal was fairly quick to point out that the subsidies were intended as an incentive for states, not unlike many other incentives for state participation incorporated into a wide variety of federal programs:

“If Governors decline to establish an exchange, their citizens are not entitled to benefits, but that is not coercion. That is the very trade-off that is supposed to encourage states to participate. If the subsidies will flow no matter what, few if any states would become the partners the Administration wanted.

More to the point, federalism is supposed to protect political accountability. Two-thirds of the states made an informed decision to rebuff ObamaCare, but if voters prefer otherwise, they can elect new Governors who won’t. If federal subsidies flow no matter what, then states aren’t presented with a real choice. That isn’t how federalism works in the American system. As Justice Kennedy rightly noted, the exchange decision was partly ‘a mechanism for states to show they had concerns about the wisdom and workability of the act in the form that it was passed.’”

Jonathan Adler has some thoughts on the same issues here and here. At the second link, Adler gives a more detailed explanation of Kennedy’s concern, which involves additional regulatory implications for the states. Adler also covers some court precedents for the kind of “coercion” at issue in King. On one case, New York v. United States, Adler says:

“In the very case that established the current anti-commandeering doctrine, the Court said there was no problem with Congress using its regulatory authority to encourage state cooperation.”

The Court would be reluctant to rule for the plaintiffs based on a principle contrary to so many of its own previous rulings. Such a justification would appear to undermine the existing extent of federal direction of state activity — a possible silver lining to a ruling for the government. But Adler also notes that what is so unique about the ACA relative to earlier precedents is that so many states decided to opt out, and there is plenty of evidence that they did so with their eyes wide open. The loss of the federal subsidies was not the only consideration in those decisions:

“… while states that choose to forego subsidies are exposing their citizens to an increase in one regulatory burden, they are relieving their citizens of others, and at least some states are perfectly happy to make that choice.”

An amusing analogy to the distinction between federal exchanges and state-established exchanges is made by Jonathan Cohn in the Huffington Post. He contends that federal and state exchanges are comparable to the the choice between butter and oil in a pancake recipe from The Joy of Cooking. You get pancakes either way, says Cohn. Therefore, he asserts that the case against the government in King is based on a specious distinction. Sean Trende at Real Clear Politics point out that the two kinds of pancakes are not the same. If Congress wishes to reward the use of butter, then one should expect the government preserve that distinction in distributing rewards.

Trende points to another distinction missed by Cohn: suppose Congress also said that the batter must be whipped by a blender at 300 rpm. In the case of Obamacare, Congress stated that an exchange must be established by a state to qualify buyers for subsidies, and it did so with the full intent of gaining cooperation from states in shouldering the administrative burdens of the law. Of course, different pancakes might be close enough, but in the end, specific language was used by Congress to create incentives for the use of certain ingredients and a particular mixing technique. The meaning of the pancake law is clear enough and is independent of whether administration officials can dream up substitutes, even if they are right out of The Joy of Cooking.

The four statist justices (some claim they are liberal) emphasized the dire consequences that a ruling for the plaintiffs would have on the insurance market and on individual buyers in states using the federal exchange. While the impact could be mitigated by the Court in various ways, the impact itself has been exaggerated by Obamacare supporters. This piece at Zero Hedge examines the likely impact in detail, but it fails to discuss a few significant benefits related to the employer and individual mandates to residents of states without their own exchanges.

Justice Kennedy is unlikely to side with the government in this case, despite his concerns about coercive federal policy. Justice Roberts was silent for almost the entire hearing, and it is not clear whether he will side with the consequentialists, find another avenue for upholding the subsidies, or defer to the plain language of the law. The Court might engage in a form of avoidance, finding a way to dismiss the case on unexpected grounds such as a lack of standing (though few consider the plaintiffs’ standing to be an issue). That would effectively grant the administration carte blanche in rewriting legislation.

In advanced civilizations the period loosely called Alexandrian is usually associated with flexible morals, perfunctory religion, populist standards and cosmopolitan tastes, feminism, exotic cults, and the rapid turnover of high and low fads---in short, a falling away (which is all that decadence means) from the strictness of traditional rules, embodied in character and inforced from within. -- Jacques Barzun